final level paper 1: accounting

VIRTUAL COACHING CLASSES ORGANISED BY BOS (ACADEMIC), ICAI

FINAL LEVEL

PAPER 1: ACCOUNTING

Faculty: S. Srikanth

© The Institute of Chartered Accountants of India

Date: 24th July 2021

Related Party Transactions [Section 188 and Sec. 2 (76)]

25 July 2021 © THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA 8

Related Party Transactions

(i)

Who is a Related Party?

Company Director or his Relative.

© THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA 3 25 July 2021


(ii)


Company A KMP or his Relative

KMP CEO, CS, WTD, CFO, such other officer as may be prescribed


(iii)


Company Firm in which Director, Manager or his relative is a Partner.



(iv)


Company

A Private Company in which Director or

Manager or his Relative is a Member or

Director.



(v) Who is a Related Party?

Director/ Manager

Company

Public Company

Is a Director

AND*

holds > 2% of PSC along

with relatives.



(vi)


Director Or

Manager

Company

BOD, MD or Manager

Advice, directions

or instructions

BC



Exception:

Advice etc.,

given in

Professional

Capacity

(vii)


ANY PERSON!!!

Director Or Manager

Advice, Directions

or instructions

Company

Exception: Advice etc., given in

Professional Capacity



(viii)Who is a Related Party?

Company

Director, KMP * or Relative

SC

Co-Subsidiary

HC

Associated Company

Significant Influence

Control of at least

TWENTY PERCENT OF

Total Share Capital or

of Business Decisions

under an agreement.

* Refer Rule 3 of Cos (SDD) Rules 2014

Significant

Influence




(ix)


Company Such other person as may be prescribed.


Relatives – Section 2(77)

1. Members of HUF

2. Husband and Wife.

3. As May be Prescribed


AS PER OLD SCHEDULE 1A

Father Mother

FF FM MF MM

Brother = BW INDIVIDUAL Sister = SH

S = SW D = DH

SS = SSW SD = SDH DS = DSW DD = DDH



As per Rule 4 of Co.(SDD) Rules 2014

Father Mother

Brother INDIVIDUAL Sister

S = SW D = DH



Father = Step Father

Mother = Step Mother

Son = Step Son

Brother / Sister = Step Brother / Sister

How about Step

Daughter?



1.Transactions requiring consent of BoD by a RESOLUTION at a Meeting of the Board.

a) sale, purchase or supply of any goods or materials;

b) selling or otherwise disposing of, or buying, property of any kind;

c) leasing of property of any kind;

d) availing or rendering of any services;

e) appointment of any agent for purchase or sale of goods, materials, services or property;

f) such related party's appointment to any office or place of profit in the company, its subsidiary company or associate company; and

g) underwriting the subscription of any securities or derivatives thereof, of the company.

Related Party Transaction


S.No.

Transactions entered Limit

(a) (i)

sale, purchase or supply of any goods or materials directly or through appointment of agents

ten percent, of the annual turnover

(ii) selling or otherwise disposing of, or buying, property of any kind directly or through appointment of agents

ten percent, of net worth

(iii) leasing of property of any kind ten percent of turnover

(iv) availing or rendering of any services directly or through appointment of agents ten percent of turnover

(b) appointment to any office or place of profit in the company, its subsidiary company or associate company

monthly remuneration exceeding two and half lakh rupees

(c) remuneration for underwriting the subscription of any securities or derivatives thereof of the company

one percent, of the net worth

Circumstances when RPT require Prior Approval of company by a ORDINARY RESOLUTION Where the value of the transactions ≥ the limits mentioned below:


The Turnover or Net Worth referred in the above sub-rules shall be on the basis of the Audited Financial Statement of the preceding Financial year.

“Net Worth” means the aggregate value of the paid-up share capital and all reserves created out of the profits and securities premium account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation.

No member of the Company who is a Related Party shall vote on such Ordinary Resolution.



S. 188 shall not apply to any transactions entered into by the Company in the ordinary course of its business.

But such Transactions should be at Arms Length.

Arms Length Transaction => A Transaction between two related Parties that is conducted as if they were unrelated, so that there is no CONFLICT of INTEREST.



Every contract or arrangement entered into with related party to which sub-section (1) applies, shall be included in the Board’s report along with

the justification for entering into such contract or arrangement.



Related Party Transaction Consequence of Non- Obtention of Board Approval

or Prior Approval by Ordinary Resolution as the case may be:

First Level

1.Ratification by Board / Share Holder as the case may be within Three Months from date of entering into contract.


Related Party Transaction Consequence of Non- Obtention of Board Approval

or Prior Approval by Ordinary Resolution as the case may be: Second Level => Not Ratified by Board / Share Holder as the case may be 1.Contract VOIDABLE at option of the Board. 2.Director(s) concerned to indemnify the company against any loss incurred. 3.Proceedings for recovery of loss against Director or Employee contravening the provision. 4.Directors/Employees who are responsible to be punished.

LISTED COMPANY → PENALTY : Rs.25,00,00 ANY OTHER COMPANY → PENALTY : Rs.5,00,00


AUDIT COMMITTEE - POWERS


The Audit Committee may make OMNIBUS APPROVAL for related party transactions proposed to be entered into by the company subject to the conditions prescribed in Rule

6A

In case of transaction, other than transactions referred to in section 188, and where Audit Committee does not approve the transaction, it shall make its recommendations

to the Board

These special provisions shall not apply to a transaction, other than a transaction referred to in section 188, between a holding company and its wholly owned subsidiary

company.]

AUDIT COMMITTEE - POWERS


Not ratified by the Audit Committee within three months from the date of

the transaction

Transaction shall be voidable at the option of the Audit Committee

IF THE TRANSACTION IS WITH THE RELATED PARTY TO ANY DIRECTOR OR IS AUTHORISED BY ANY OTHER DIRECTOR, THE DIRECTOR CONCERNED SHALL INDEMNIFY THE COMPANY AGAINST ANY LOSS INCURRED BY

IT

Conditions for getting Omnibus Approval from Audit Committee [Rule 6A of the Companies (Meetings of Board and its Powers) Rules, 2014

1. The Audit Committee shall, after obtaining approval of the Board of Directors, specify the criteria for making the omnibus approval which shall include the following:

a) maximum value of the transactions, in aggregate, which can be allowed under the omnibus route in a year;

b) the maximum value per transaction which can be allowed;

c) extent and manner of disclosures to be made to the Audit Committee at the time of seeking omnibus approval;

d) review, at such intervals as the Audit Committee may deem fit, related party transaction entered into by the company pursuant to each of the omnibus approval made;

e) transactions which cannot be subject to the omnibus approval by the Audit Committee.



2. The Audit Committee shall consider the following factors while specifying the criteria for making omnibus approval: -

a) repetitiveness of the transactions (in past or in future);

b) justification for the need of omnibus approval.

3. The Audit Committee shall satisfy itself on the need for omnibus approval for transactions of repetitive nature and that such approval is in the interest of the company



4. The omnibus approval shall contain or indicate the following: -

a) name of the related parties;

b) nature and duration of the transaction;

c) maximum amount of transaction that can be entered into;

d) the indicative base price or current contracted price and the formula for variation in the price, if any; and

e) any other information relevant or important for the Audit Committee to take a decision on the proposed transaction:

However, where the need for related party transaction cannot be foreseen and aforesaid details are not available, audit committee may make omnibus approval for such transactions subject to their value not exceeding rupees one crore per transaction.



5) Omnibus approval shall be valid for a period not exceeding one financial year and shall require fresh approval after the expiry of such financial year.

6) Omnibus approval shall not be made for transactions in respect of selling or disposing of the undertaking of the company.

7) Any other conditions as the Audit Committee may deem fit.


Disclosure of Interest by Director [Section 184] TYPES OF DISCLOSURES

I. Event Based Disclosure

II. Periodic Disclosure


Event Based Disclosure [Section 184] I. Types of Contract

a) Proposed Contract or Arrangement

b) Any other contract or Arrangement i.e., Existing Contract or Contract or Arrangement where Director becomes concerned or Interested subsequent to entering.


II. Parties to the Contract

Every director of a company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be entered into WITH

a. Hold > 2% Share or Promoter / Manager / CEO

Director

Company Body Corporate

Event Based Disclosure [Section 184]


II. Partner

Director

Company Firm

Other Entity



III. Timing

i. Proposed Contract or Arrangement

DOUBT: Can Director participate at subsequent BM at which the contract is discussed say, for price revision etc.?

ii. Any other contract

Director NOT to participate in such meeting

At the BM at which Contract or Arrangement is discussed.

Forthwith or at the first BM after he becomes concerned or interested.



Timing:

At first BM as a Director and thereafter at the first BM in every financial year.

Periodic Disclosure [Section 184]


What to disclose?

Concern of interest in any

Company or companies or

Bodies Corporate

Firms

Other association of Individuals

Concern or Interest includes Share holding

Prescribed Form MBP 1

Periodic Disclosure [Section 184]


Periodic Disclosure [Section 184] 1. Power to take note of the disclosure of director’s interest and share holding can

be exercised only BY MEANS OF RESOLUTIONS PASSED AT BM.

(Sec 179(3) r.w. Rule 8 of Cos(MBP) Rules 2014)

2. MGT - 14 to be filed within THIRTY days of Passing of Resolution under section 179(3),

(Sec 117(3)(g) read with Rule 24 of Cos(MAD) Rules, 2014)


For Company

Contract shall be voidable at the option of the company

For Director so Concerned or Interested

Penalty of Rs.1,00,000/-

Consequence of Non-Disclosure / Participation by Director [Section 184]


Conviction under S. 188 within the preceding Five years is a ground for Disqualification [Sec. 164 (1)(g)]

Failure to disclose interest and contravention of S. 184 is a ground for vacation. [Sec. 167 (1) (c) & (d)]




Notable Exception

S. 184 does not apply to any contract or arrangement where any of the directors of the company or two or more of them together hold not more than 2% of the PSC in the other company.

Director Director

No Director of A Ltd holds share in B Ltd and vice versa.

A Ltd B Ltd Contract


Restriction on Non-Cash Transactions Involving Directors [Section 192] Prior approval of shareholders required in general meeting for a company to enter into an arrangement by which:

a) A director of the company or its holding, subsidiary or associate company or a person connected with him acquires assets for consideration other than cash, from the company; or

b) The company acquires assets for consideration other than cash, from such director or person so connected.


Person Connected

The term “Person Connected” has not been defined thereby leads to ambiguity.


Restriction on Non-Cash Transactions Involving Directors [Section 192]

2. The notice for approval of the resolution by the company or holding company in general meeting shall include the particulars of the arrangement along with the value of the assets involved in such arrangement duly calculated by a registered valuer.


Restriction on Non-Cash Transactions Involving Directors [Section 192]

3. Any arrangement entered into by a company or its holding company in contravention of the provisions of S 192 shall be voidable.

a) the restitution of any money or other consideration which is the subject matter of the arrangement is no longer possible and the company has been indemnified by any other person for any loss or damage caused to it; or

b) any rights are acquired bona fide for value and without notice of the contravention of the provisions of this section by any other person.


Register of contracts or arrangements in which directors are interested [Section 189] 1) Every company shall keep one or more registers giving separately the

particulars of all contracts or arrangements to which sub-section (2) of section 184 or section 188 applies, in such manner and containing such particulars as may be prescribed.

After entering the particulars such register or registers shall be placed before the next meeting of the Board and signed by all the directors present at the meeting.


Register of contracts or arrangements in which directors are interested [Section 189] 2) Every director or key managerial personnel shall, within a period of

thirty days of his appointment, or relinquishment of his office, disclose to the company the particulars relating to his concern or interest in the other associations which are required.

3) The register shall be kept at the registered office of the company and it shall be open for inspection at such office during business hours and extracts and copies shall be furnished by the company on payment of such fees as may be prescribed.


Register of contracts or arrangements in which directors are interested [Section 189]

4) The register shall also be produced at the commencement of every annual general meeting of the company and shall remain open and accessible during the continuance of the meeting to any person having the right to attend the meeting.



EXEMPTION

(a) for the sale, purchase or supply of any goods, materials or services if the value of such goods and materials or the cost of such services does not exceed five lakh rupees in the aggregate in any year; or

(b)by a banking company for the collection of bills in the ordinary course of its business.



CONTRAVENTION

Every director

Rs.25,000


Contract of employment with managing or whole-time directions [Section 190] 1. Every company shall keep at its registered office,—

(a) where a contract of service with a managing or whole-time director is in writing, a copy of the contract; or

(b) where such a contract is not in writing, a written memorandum setting out its terms


Contract of employment with managing or whole-time directions [Section 190]

2. The copies of the contract or the memorandum kept shall be open to inspection by any member of the company without payment of fee.

3. The provisions of this section shall not apply to a private company.


Contract of employment with managing or whole-time directions [Section 190]

CONTRAVENTION/DEFAULT


Company Every director

Rs.25,000 Rs.5,000 For each default

Payment to director for loss of office, etc., in connection with transfer of undertaking, property or shares. [Section 191]

Subject to the conditions of disclosure and approval as mentioned above, a director of a company may receive payment: by way of compensation for loss of office, or

as consideration for retirement from office, or

in connection with such loss or retirement from such company, or

from the transferee of such undertaking or property, or

from the transferees of shares or

from any other person, not being such company



Section 191(2)

Any payment made by a company to a managing director or whole-time director or manager of the company by way of compensation for loss of

office or as consideration for retirement from office or in connection with such loss or retirement subject to limits or priorities


Rule 17 (1) of the Companies (Meetings of Board and its Powers) Rules, 2014

The specified particulars which need to be disclosed to the members

a) name of the director;

b) amount proposed to be paid;

c) event due to which compensation becomes payable;

d) date of Board meeting recommending such payment;

e) basis for the amount determined;

f) reason or justification for the payment;

g) manner of payment - whether payable in cash or otherwise and how;

h) sources of payment; and

i) any other relevant particulars as the Board may think fit


No compensation payable under specific circumstances-Rule 17 (3)


Rule 17(3)

the company is in default in repayment of public deposits or payment of interest thereon;

the company is in default in redemption of debentures or payment of interest thereon;

the company is in default in repayment of any liability, secured or unsecured, payable to any bank, public financial institution or any other financial institution;

No compensation payable under specific circumstances-Rule 17 (3)


Rule 17(3)

The company is in default in payment of any dues towards income tax, VAT, excise duty, service tax or any other tax or duty, by whatever name called, payable to the Central

Government or any State Government, statutory authority or local authority

There are outstanding statutory dues to the employees or workmen of the company which have not been paid by the company (other than in cases where the company has disputed the

liability to pay such dues); and

The company has not paid dividend on preference shares or not redeemed preference shares on due date.


Section 191(1)

No director of a company shall, in connection with receive any payment by way of compensation for loss of office

a) The transfer of the whole or any part of any undertaking or property of the company; or

b) The transfer to any person of all or any of the shares in a company being a transfer resulting from— i. an offer made to the general body of shareholders; ii. an offer made by or on behalf of some other body corporate with a view to a company becoming a

subsidiary company of such body corporate or a subsidiary company of its holding company; iii. an offer made by or on behalf of an individual with a view to his obtaining the right to exercise, or

control the exercise of, not less than one-third of the total voting power at any general meeting of the company; or

iv. any other offer which is conditional on acceptance to a given extent.



Section 191(3)

If the payment is not approved for want of quorum either in a meeting or an adjourned meeting, the proposal shall not be deemed to have

been approved



Section 191(4) and (5)

4) Where a director of a company receives payment of any amount in contravention or the proposed payment is made before it is approved in the meeting, the amount so received by the director shall be deemed to have been received by him in trust for the company.

5) If a director of the company contravenes the provisions of this section, such director shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees



Section 191(6)

. Nothing in this section shall be taken to prejudice the operation of any law requiring disclosure to be made with respect to any payment received under this section or such other like payments made to a

director.


CONTRACTS BY ONE PERSON COMPANY (OPC) [SECTION 193]


Where One Person Company limited by shares or by guarantee enters into a contract with the sole member of the company who is

also the director of the company

The company shall, unless the contract is in writing,

Ensure that the terms of the contract or offer are contained in a memorandum or are recorded in the minutes of the first meeting of the Board of Directors of

the company held next after entering into contract

CONTRACTS BY ONE PERSON COMPANY (OPC) [SECTION 193]

The company shall inform the Registrar about every contract entered into by the company and recorded in the minutes of the meeting of its

Board of Directors within a period of fifteen days of the date of approval by the Board of Directors



THANK YOU

final level paper 1: accounting

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